N.

GREGORY MANKIW
PRINCIPLES OF

ECONOMICS
Eighth Edition

CHAPTER Interdependence and

3 the Gains from Trade
Premium PowerPoint Slides by:
V. Andreea CHIRITESCU
Eastern Illinois University
© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
1
management system for classroom use.
 Look for the answers to these questions:
• Why do people – and nations – choose to
be economically interdependent?
• How can trade make everyone better off?
• What is absolute advantage?
• What is comparative advantage?
• How are these concepts similar?
• How are they different?

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 2
management system for classroom use.
 Interdependence
• “Trade can make everyone better off”
– One of the Ten Principles from Chapter 1
– We now learn why people – and nations –
choose to be interdependent
– And how they can gain from trade

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 3
management system for classroom use.
 Our Example
• Two persons:
– Rubi and Frank
• Two goods:
– Meats and Potatoes
• One resource:
– Labor, measured in hours
• How much of both goods each country produces
and consumes
– If the country chooses to be self-sufficient
– If it trades with the other country
© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4
management system for classroom use.
 Our Example
• Additional assumptions
– Labor : 8 hours per 1 day
– Potato cultivation or Cow care

• Production Possibilities Frontier (PPF):

– The combination of outputs that an economy
can produce

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 5
management system for classroom use.
 PPF

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 6
 PPF

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 7
 Consumption With and Without Trade
• Without trade:
• Frank consumes 16 oz. of potatoes and 4 oz.
of meats
• Rubi consumes 24 oz. of potatoes and 12 oz.
of meats
• Comparison
– Consumption without trade vs. consumption
with trade
– We need to see how much of each good is
produced and traded by the two countries
© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 8
management system for classroom use.
 Consumption With and Without Trade
• Specialization:
– Frank : Specialized in potato production
• Increase the time to grow potatoes
• Reduce the time to care for cows
– Rubi : Specialized in meat production
• Reduce the time to grow potatoes
• Increase the time to care for cows
• Exchange:
– Meat 5 oz. vs. Potato 15 oz.
© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 9
management system for classroom use.
 Exchange

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 10
 Exchange

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 11
 Where Do These Gains Come From?
• Absolute advantage:
– The ability to produce a good using fewer
inputs than another producer
– Rubi has absolute advantage in meats
• Producing an oz. of meat uses 20 minutes in
Rubi vs. 60 minutes in Frank
– Rubi has absolute advantage in potatoes
• Producing an oz. of potatoes requires 15
minutes in Frank, but only 10 minutes in Rubi

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 12
management system for classroom use.
 Where Do These Gains Come From?
Rubi has an absolute advantage in both
goods!
– So why does Frank specialize in
potatoes?
– Why do both countries gain from trade?
• Two persons can gain from trade
– When each specializes in the good it
produces at lowest cost

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 13
management system for classroom use.
 Two Measures of the Cost of a Good
• Absolute advantage
– Measures the cost of a good in terms of
the inputs required to produce it
• Another measure of cost: opportunity cost
– The opportunity cost of a potato = amount
of meat that could be produced using the
labor needed to produce one potato

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 14
management system for classroom use.
 Opportunity costs

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 15
 Comparative Advantage
• Comparative advantage
– The ability to produce a good at a lower
opportunity cost than another producer
• The opportunity cost of one meat is
– 4 potatoes in Frank vs. 2 potatoes in Rubi
• The opportunity cost of one potato is
– 1/4 meats in Frank vs. 1/2 meats in Rubi
• Rubi has comparative advantage in meats
• Frank has comparative advantage in potatoes
© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 16
management system for classroom use.
 Comparative Advantage
• Principle of comparative advantage
– Each good should be produced by the
individual that has the smaller opportunity
cost of producing that good

• Specialize according to comparative

advantage

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 17
management system for classroom use.
 Comparative Advantage and Trade
• Gains from trade
– Arise from comparative advantage
(differences in opportunity costs)
• When each country specializes in the
good(s) in which it has a comparative
advantage
– Total production in all countries is higher
– The world’s “economic pie” is bigger
– All countries can gain from trade
© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 18
management system for classroom use.
 Exchange prices
5 oz. of meats = 15 oz. of potatoes
→ 1 oz. of meats = 3 oz. of potatoes
→ 1/3 oz. of meats = 1 oz. of potatoes

• Frank:
– 고기 1온스의 기회비용(감자 3온스)>고기 1온스 거래가격(감자 3온스)

• Rubi:
– 감자 1온스의 기회비용(고기 ½ 온스)>감자 1온스 거래가격(고기 1/3온스)

• Exchange price decides between opportunity

cost of two goods
Rubi 기회비용(감자 2온스) < 고기(감자 3온스) < Frank 기회비용(감자 4온스)
Rubi 기회비용(고기 1/2온스) > 감자(고기 1/3온스) > Frank 기회비용(고기 1/4온스)
© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 19
 Comparative Advantage and Trade
• 비교우위 원리의 응용
– 세레나 윌리엄스가 자기 집 잔디를 직접
깎어야 할까?
• 세레나: 2시간 소요
– 잔디 깎기
– TV 광고 출연으로 $30,000 소득
• 옆 집에 사는 팀
– 잔기 깎기
– 맥도널드에서 일하고 $50 소득

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 20
management system for classroom use.
 Exports and Imports
• Imports
– Goods produced abroad and sold
domestically
• Exports
– Goods produced domestically and sold
abroad

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 21
management system for classroom use.
 Summary
• Interdependence and trade are desirable
– Allow everyone to enjoy a greater quantity and
variety of goods and services
• Comparative advantage: being able to produce
a good at a lower opportunity cost
• Absolute advantage: being able to produce a
good with fewer inputs
• The gains from trade are based on comparative
advantage, not absolute advantage

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 22
management system for classroom use.
 Summary
• Trade makes everyone better off
– It allows people to specialize in those activities
in which they have a comparative advantage
• The principle of comparative advantage applies
to countries as well as to people
• Economists use the principle of comparative
advantage to advocate free trade among
countries

© 2018 Cengage Learning® . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 23
management system for classroom use.